This week is National Small Business Week – a week we celebrate the economic engine of our country and our state. Maine is comprised largely of small businesses. In fact, 80 percent of the businesses in Maine employ 10 or fewer workers. We need to support our small businesses because they provide our goods, employ our families and contribute heavily to our economy.
One tool our federal government provides to help small businesses is the U.S. Small Business Administration loan. The SBA is America’s largest single financial backer of small businesses. Together, the SBA and partner banks lend to small businesses through the 7(a) and 504 loan programs. These loans make it easier for small businesses to acquire the financing they need to grow their companies.
First, some SBA basics.
Both the SBA 7(a) and 504 programs are partnerships with banks, which grew as banks tightened their credit standards for commercial and industrial loans and lines of credit during the recent downturn.
The SBA 7(a) program provides the most commonly used type of SBA loan. A bank partners with the SBA, the bank processes the loan application under SBA processes, and the SBA provides a guaranty, protecting the bank against default. The bank essentially creates and administers the loan and the SBA backs it. The maximum gross loan size of a 7(a) loan is $5 million and the loan guaranty is 75 percent.
The SBA 504 loan program allows business owners to make significant investments in land, buildings, and some types of equipment and machinery. A bank lends 50 percent of the total project cost, while a certified development corporation lends 40 percent, and the borrower contributes equity of 10 percent. The program reduces the risk to the bank in such a partnership and allows the borrower to expand the business while retaining operating capital.
Interest rates and terms are more generous than conventional financing, although job creation requirements and other eligibility guidelines apply. The interest rate on 504 loans is fixed for 10 years on equipment and 20 years on real estate, compared with traditional small-business loans with 10- to 15- year terms for real estate ending in a balloon payment.
The limit for 504 loans is $5 million for most applications and $5.5 million for manufacturers and green projects. In some cases, 504 loans can also be used for refinancing existing debt on loans, although some conditions apply on refinancing existing debt through new SBA 504 loans.
Eligibility for both 7(a) and 504 loans extends to businesses whose net worth is not more than $15 million or whose average net income for the preceding two completed fiscal years does not exceed $5 million.
When the SBA guarantees a loan, that reduces the risk to the bank, and this in turn allows the institution to offer longer repayment terms to the borrower, decrease the loan payments and eliminate prepayment penalties (except for commercial real estate financed through the 504 program).
The SBA financing ensures a “win-win-win” situation for small businesses, banks and communities:
- The SBA loan guaranty minimizes the bank’s risks.
- Reducing the risk to the bank allows it to provide loans it might not otherwise risk, while enabling the bank to improve the borrower’s loan terms. This preserves capital within the borrower’s business, facilitating additional investments in staff, facilities or inventory by the borrower.
- The bank’s financing leverages the SBA’s ability to assist small businesses, facilitating investments that build success and expand the tax rolls as well as enhance tax revenues.
- SBA loans also benefit communities by encouraging job development.
Your trusted banker, preferably an SBA Preferred Lender, can walk you through the steps to obtain SBA financing. As with all business loans, a lender will review your credit scores and other data, including the length of time your company has been in business and its sales, revenues, profits and cash flow. If your personal finances and the company’s finances are intertwined, your lender will make a combined assessment. Simply put, lenders need confidence that you are able to pay back the loan.
SBA loans were created to help small businesses across the country make the investments they need to grow. Consider the future of your company and if you see growth, consult with your banker about whether an SBA loan makes sense for you.
Steven Gagnon is a senior vice president and oversees KeyBank’s Business Banking in Maine. His office is at 480 Main St. in Presque Isle, and he may be reached at Steven_L_Gagnon@KeyBank.com or 764-9419.
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